The Council of Ministers approved a gradual rise in energy taxes to return to pre-crisis levels. The plan includes raising the value-added tax on electricity from 5% to 10% during 2024. The Special Electricity Tax will climb from 0.5% to 2.5% in the first quarter and to 3.8% in the second quarter; the Electric Energy Production Value Tax will be 3.5% through March and 5.25% through June. If natural gas is taxed at the supply VAT, it will be 10% in the first three months of 2024.
Head of Government Pedro Sánchez outlined this at the post-Cabinet press conference as the eighth aid package to mitigate the economic impact of the war in Ukraine. Europe’s mandate calls for phasing out measures adopted to counter the energy crisis, while the Executive aims to avoid triggering new price increases amid inflation. To support this, the government will tap a substantial reserve labeled the electric piggy bank, valued at more than €6 billion, and will use specific items included in the upcoming General State Budget, according to the Ministry of Ecological Transition.
Protection of the vulnerable
Even with the reversal of some tax cuts, the government will continue to safeguard safeguards for consumers during the energy crisis. Assistance for the most vulnerable remains, including measures like protecting against power outages and extending electricity and thermal social bonuses. Three tiers of vulnerable consumers will receive social electricity bonuses and discounts of 40%, 65%, and 80%, while fixed components of the electricity bill remain reduced so charges stay well below pre-war levels.
The growth cap on regulated gas rates, the Special TUR, and discounts for local communities will remain in place. Other measures announced earlier also stay, such as extending food VAT reductions through June, a transport bonus for youth, the unemployed, and pensioners, and a switch from variable to fixed mortgages. Public assistance at work and the suspension of evacuations for vulnerable populations are confirmed by Sumar sources.
Government maintains free Cercanías and public transport subsidy
Other measures
The government leveraged the new decree to promote energy transition by adding uneconomic tender criteria with a maximum weight of 30% in upcoming renewable energy auctions, aligning with the European Wind Energy Package to boost European production and curb imports from third countries.
Administrative processing times for new renewable energy projects were adjusted, establishing a six-month extension to reach 49 months for the Administrative Permit to Construct. The period for obtaining the Administrative Permit for Industry Abuses was extended from five to eight years. Ten percent of the capacity of electricity transmission network nodes will be reserved to ensure the evacuation of surpluses from self-consumption facilities.
Different scenario
In this move, the Council of Ministers aligns measures to restore the pre-crisis energy price trajectory. Electricity prices rose sharply in 2023, with gas following a similar pattern, but both fell short of the European average and stood among the lowest in 13 years, according to Eurostat. INE data show that electricity prices in November were 13.6% lower than in 2022, and natural gas prices were 19.7% lower year over year. The new decree aims to manage expenditures on electricity and gas by changing the tax base and reducing the value of taxes applied in the last two years.
Up to 3.5 billion
Tax cancellations—VAT, the special tax, and the production tax—are expected to positively affect electricity by about €3.1 billion in 2024, with gas VAT contributing roughly €1,094 million. Overall, energy taxation is projected to rebound by €3.5 billion for a full year, as outlined in the Ministry of Finance’s State Budget Rebalancing Plan. The reduction of tax cuts is linked to inflationary pressure; INE estimated that these cuts helped lower inflation by about three-tenths in 2022 and a further three-tenths in 2023 through November. Removing the tax cuts could contribute to an upward inflation effect going forward.
Gradual sales
The spring 2021 move to ease electricity costs began with VAT reductions on electricity as Russia started pressuring gas supplies. By June of that year, the wholesale price of electricity spiked, prompting a temporary VAT reduction from 21% to 10% and adjustments to the electricity production tax. The portion collected from electricity production links to energy suppliers and is reflected in consumer bills. The price increase persisted, and by that summer higher figures prompted further actions, including cutting theSpecial tax on electricity to its minimum and adjusting revenues from hydro and nuclear plants. The government acted to keep fixed-price contracts fair and to ensure that companies comply with these rates, a policy expected to continue into the next year. After the war in Ukraine began in March 2022, prices surged to unprecedented levels before gradually easing. The government then looked at further reductions in VAT on electricity down to a targeted level around the Iberian market arrangement to limit price volatility.
Staple foods will continue to be VAT-free until next June
In autumn 2022, as fears of heating costs loomed, the minimum 5% VAT rate extended to the gas bill, with subsidies for regulated tariffs for neighborhood communities. Some business groups requested rate changes as bonuses expired, raising concerns about inflation and the affordability of essential goods. The ongoing reductions in VAT on food were expected to extend for another six months.